The dust-up over China's restrictions on the export of rare earth minerals masks an unpleasant truth: The West and Western manufacturers are paying a hefty price for their greed and stupidity.
Western mines were once the main manufacturers of these minerals, and known deposits in the United States, Europe, Australia, and Russia account for a majority of global reserves. But at one point, it became easier and much cheaper to get the minerals from China. We shuttered Western mines, laid off the miners, and told the Chinese we'd take all the rare earths they could produce. Now China is tightening the price and supply screws. Why are we surprised?
It may be a sign of what the future holds for Chinese-Western relations. I know it may seem like I am forcing the issue, but this situation buttresses my point in previous blogs about the dangers of shifting too much global manufacturing not just to one region of the globe, but to a single country. (See: 5 Reasons Western Factories Will Hum Again and Manufacturing Will Grow Again in the West.)
China has become the go-to place for most high-tech manufacturers, and the failure to provide backup or assure critical redundancy measures may come to haunt everyone.
The rare earths dispute is a potent example of this glaring error. On Tuesday, the European Union, Japan, and the US hauled China before the World Trade Organization and accused it of hindering free trade and imposing unfair conditions on foreign companies by cutting supplies of the rare earth minerals used in a wide range of products, including high-tech equipment.
Even President Obama weighed in by saying China's actions were hurting American manufacturers. “We want our companies building those products right here in America. But to do that, American manufacturers need to have access to rare earth minerals which China supplies.”
First, let's deal with the outrage of the complainants. I am only surprised that it took this long for them to act after more than a year of quiet complaining and negotiations to get China to open up its rare earths market to non-Chinese companies.
EBN bloggers have discussed how the Chinese government is controlling access to the metals and giving preferential treatment to local companies on the basis that they need the minerals to keep their factories running. (See: The Truth About Rare Earths, Part 1 and The Truth About Rare Earths, Part 2.)
Since many of these companies manufacture products for export, China's government felt justified in assuring supply to local manufacturers first. But over the last six months, China has imposed even more stringent terms for foreign access to the minerals. Since the country controls 97 percent of global production, this has caused a stir, especially among European, American, and Japanese high-tech companies. More recently, China not only has cut the quota available to foreign companies, but also has begun fiddling with prices. It has established a two-tier structure where Chinese companies get minerals for less than half the amount paid by foreign competitors.
The Chinese government has defended its actions by saying it is trying to curb pollution. Yes, China says it is worried that its environment might be hurt by overexploitation of a group of minerals that, despite the name, are commonly available in the country. I don't buy that reason, so let's look at the economics.
China, in my opinion, is more concerned about the overexploitation of its mineral resources and is trying to make it more expensive for foreign companies to access them. Consider this: China accounts for “36 percent of the world's total reserves” of rare earth minerals, according to a report by the official Xinhua news agency. Yet the country is responsible for more than 90 percent of global production. That's screwed up!
“China is contributing tremendously to the rare earth industry,” the Xinhua report said. “China's rare earth measures, including imposing export quotas, are fair and legitimate, and are simply aimed at protecting its environment as well as its natural resources. They also conform to relevant WTO rules.”
You disagree? The WTO will give its ruling eventually, but by then the cost to Western companies will have risen even higher. China might even ignore the WTO and wait for the West to impose retaliatory measures. Which would be what, exactly? Stop buying Chinese products? Sure.
We made our bed, and it's not comfortable lying in it.